Adam Smith's Lost Legacy

Monday, January 31, 2011

Being Mostly Right Is Better Than Being Mostly Wrong

“Is free market capitalism actually practiced in the United States today still alive or is it now just a product of our imagination?

Let’s analyze the facts and see for ourselves.

Americans have traditionally believed that the "invisible hand of the market" means that capitalism will benefit us all without requiring any oversight. However, the man (i.e. Adam Smith) who came up with the idea of the invisible hand did not believe in a magically benevolent market which operates for the benefit of all without any checks and balances:

Smith railed against monopolies and the political influence that accompanies economic power...

Smith worried about the encroachment of government on economic activity, but his concerns were directed at least as much toward parish councils, church wardens, big corporations, guilds and religious institutions as to the national government; these institutions were part and parcel of 18th-century government...

Smith was sometimes tolerant of government intervention, 'especially when the object is to reduce poverty. Smith passionately argued, ''When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favor of the masters.'' He saw a tacit conspiracy on the part of employers ''always and everywhere'' to keep wages as low as possible.

Yes….Adam Smith may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime.”

CommentThe article is mostly right about Smith – clearly its author has read Wealth Of Nations and is welcome for that and is worthy of congratulations for getting Adam Smith so right.

The muddle about the invisible hand is unfortunate, so I would add my remarks below.

It wasn't Smith who was wrong about his use (only once in Wealth of Nations) of the invisible hand metaphor; those modern economists were wrong who attributed to him an invisible hand that applied to markets. This is myth.

Smith did not hold that the invisible hand guided or operated in markets; he used in a different context.

Among the first to assert the popular modern view of the metaphor was Paul Samuelson in his text-book, Economics (1948), from which all the 'beneficial' affects flowed. But, even Samuelson had to modify his claims in later editions.

For Smith, some merchants, but not all, avoided foreign and colonial trade because of the higher risks involved, therefore, they invested domestically instead, thus adding to domestic 'annual revenue and employment'. This arithmetic consequence had nothing to do with general equilibrium or the welfare theorems. Rama Cont should identify the real cultprit, Samuelson - Adam Smith was right; his claims were much more modest in that the whole is the sum of its parts.

Sunday, January 30, 2011

Another Look at Adam Smith and the Market

A correspondent writes to me on some nuanced differences we have on matters relating to aspects of Adam Smith’s “core beliefs” on how markets work. In a recent exchange he ventured into “Invisible hand” territory, which prompted my response below. It is a self-explanatory response:

"I think there is a fair measure of agreement between us (bar one or two relatively smaller points), including the so far non-discussed matter of the modern interpretation of the meaning of Adam Smith’s use of the metaphor on an “invisible hand” (IH metaphor), especially when interpreted to be Adam Smith’s “invisible hand of the market”, ofwhich I have made many detailed criticisms throughout the Lost Legacy Blog since 2005 and in print since 2008.

However, I would like come at this from another angle arising from your presentation of the role played by discrepancies be and market prices in Smith’s Wealth Of Nations, which, seeing as we broadly agree on the consequences of these discrepancies for decisions on output and price levels in a commercial economy, your (startling - to me) statement that “Collective outcomes must be left to the impersonal, and heteronomous, operation of the “invisible hand” of the market.” I could not leave this alone without comment.

You write: “just consider how individuals in a market system—who are, of course, all trying to maximize their individual material gain—decide what to produce, how much to produce, what to buy and sell, how to invest their capital (if they have any), etc. They look at, and compare, relative prices. Prices, one might say, are the signals that guide individuals in deciding how to pursue their self-interest in the market” (my emphasis).

I have often argued (and as often to no avail) that there is nothing invisible in markets – in fact it is their necessary visibility that provides the essential dynamic for their operation. Prices are very visible; they have to be because prices are what influences purchases and competitive responses. Potential buyers do not have to 'guess' the price. Participants, you write, “look at, and compare, relative prices” and “decide what to produce, how much to produce, what to buy and sell,how to invest their capital (if they have any)”.

Now Smith never mentions the IH metaphor in Books I, II, III, and V, of WN, even when he discussed in his core theory detail, and for good reason: there was no role for the IH metaphor in his core theory. All metaphors have “objects”, as Adam Smith taught his students in his “Lectures on Rhetoric and Belles Lettres” ([1762-63] 1983). But the object of this metaphor, in Smith’s use of it, had nothing at all to do with markets.

It was Paul Samuelson who articulated an oral tradition at Chicago in the 1930s and, separately, in Cambridge, England in the 1920s, but he gave it wide prominence in his Economics: an introductory analysis, 1948, p 36 (and in the 19 editions of his popular text right up to 2010), while claiming inaccurately that he spoke of Adam Smith’s theory. Since, the 1950s, modern economists have broadcast this invention and it is now has the mythical status of being “core belief” and it is linked conveniently (and incredibly) to the welfare theorems and to general equilibrium theory.

What then, in addition to the necessary requirement that prices are made visible in markets, does the IH metaphor add to the theory and practice of market dynamics? Markets don’t need some hidden and mysterious (never defined) term in addition to prices to do their work. [And no such term exists in the equations of general equilibrium theory.]

Smith used the metaphor only once in WN (p 445) and only once in TMS (p 184) (and only once in his posthumous Essay on the History of Astronomy, p 49). In none of these case was Smith referring to how markets work. In TMS he referred to feudal landlords having to feed their serfs, slaves and retainers, which enabled them to work for him and, unintentionally, for the propagation of the human species; in WN he referred to some, but not all, merchants whose insecurity about the risks of foreign and colonial trade led them to prefer to invest in the ‘domestick’ market, which added to “annual output and employment” (an example of the simple arithmetic rule that the whole is the sum of its parts), and in HOA he referred to credulous Romans who believed that the invisible god Jupiter fired intervened in human affairs with thunderbolts from his invisible hand at enemies of Rome.

In each case, the object of the metaphor is specified: in TMS, the landlords were ‘led by an invisible hand’, out of the obvious necessity of feeding their serfs, peasants and retainers, if they were to survive to work through the seasons and the winters; in WN, the risk averse merchants were ‘led by an invisible hand’ to invest locally, to avoid the higher risk of the loss of their capital and their destitution that could follow; and in the HOA, Romans were led by ‘the invisible hand of Jupiter’ to fear their god’s fury if they wished to avoid Jupiter’s intervention in their mortal lives (what Smith called their ‘pusillanimous superstition’.

Smith’s use of the popuIar 17th and 18th century IH metaphor described in a “more striking and interesting manner”, (Lectures on Rhetoric, p 29). Smith’s meaning, was in their objects – all the rest was invented to suit ideological ends, using Adam Smith’s name for legitimacy.

Natural Law Was Not About Selfishness And Exchange Is Based on Reciprocation

“The shift from a European-based sense of commonwealth to a me-first free-for-all dates primarily from the 1790s.* Until that time, according to Joyce Appleby, the idea of a greater good and a system of reciprocal obligations still carried some weight, and the word "virtue" was defined as a commitment to those things. Under the impact of the ideas of Adam Smith and the Scottish enlightenment, however, this began to change. The new Newtonian-based philosophy held that societies were collections of individuals ("atoms"), and that the pursuit of profit on the part of each of these entities combined–i.e. the collective result of individual self-interest–would be the prosperity of the whole. "Virtue," in other words, had by 1800 come to mean personal success in an opportunistic environment; looking out for Number One.

The result was that the glue that had held colonial life together began to disintegrate, for individual greed is basically an antiglue. Historically speaking, according to Gordon Wood, this constituted a complete transformation in human social relations, amounting to a very new type of society. One might even call it an antisociety.”

CommentAdam Smith was in the Natural Law tradition influenced by Grotius, Pufendorf, Carmichael and Hutcheson, which regarded the individual as a beneficiary of certain basic natural rights, including property in self, hence slavery breached Natural Law and was not about "greater social good"). This did not mean that individuals were atomistic, isolated, and hostile to each other.

For a start individuals live in societies and are socialized through, first, those closest to them – the family – and through relatives, and adults in social contact – the ‘great school of self command’ - and who constitute ‘societies mirror’ which helps form them from childhood into acceptable behaviours, rather than plain selfishness. [see Smith’s Theory of Moral Sentiments, 1759.]

Morris Berman is offering a ‘theory’ about ‘colonial life’, of early America to suit a fairly heavy ideological agenda (follow the link above). His basic premise is wrong. His assertions about Adam Smith are wrong. His claim of “looking out for Number One” played no part in Natural Law or Adam Smith’s moral sentiments. Because Morris gets these wrong, his ‘theory’ is more than suspect.

Thursday, January 27, 2011

Critic of Free Markers Gets It Wrong

James Tatum writes in THE EASTERN ECHO – “News and nonsense spiced with nerve” - (HERE)

'Free-Marketeers' have it wrong”

“These prophets of laissez-faire economics present a false choice between the heavy hand of government and the invisible hand of the market.

“The invisible hand of the market,” a metaphor used by economist Adam Smith in his book “The Theory of Moral Sentiments,” was used to illustrate the point market forces, not government, should be used to allocate resources within society.Free-market fundamentalists often cite the point made in Smith’s book, all the while omitting another point that Smith made within the very same text.

Smith also believed government had an important role to play in the economy. He believed the government should enforce contracts, provide public works and most importantly protect consumers.”

Comment

Adam Smith did not use the metaphor of “an invisible hand” in The Theory of Moral Sentiments (1759) to “illustrate the point market forces, not government, should be used to allocate resources within society”. He did not even mention “market forces” nor “government” (See Moral Sentiments, Part 4, Chapter 2).

He was discussing how “proud” and “unfeeling” feudal landlords, basking in their self-important greatness, were obliged to feed their retainers (thugs) and their downtrodden serfs and their families from some of the produce of their land and they were “led by an invisible hand”, unintentionally, to enable the survival of the population and, through their “progeny”, to generate a growing population. They had no choice but to maintain the subsistence of their serfs because without subsistence, who would plant the crops and harvest them?

No markets are mentioned, nothing about “capitalism’, and nothing (not a word) about “government”, nor its roles. James Tatum has not read, nor understood, Adam Smith’s Theory of Moral Sentiments.

Wednesday, January 26, 2011

"Hard Wired" and "Innate"?

Yale University economist, Robert Shiller is quoted by Larry Willmore on Thought du Jour Blog (HERE)

“Robert Shiller on Adam Smith”

“Shiller sees that sometimes people are completely selfish, and that’s the problem for any economic theory – how to make a society work when people are completely, unremittingly selfish.

But he also notes something else: he doesn’t use the word ‘empathy’, because ‘empathy’ hadn’t been defined yet. But it’s a very important observation about human behaviour, which is that we are wired to feel each other’s emotions and to have a theory of other people’s minds (not that he would have used the words ‘wired’ or ‘theory of mind’ either)….

… Smith also talks about a selfish passion, which is a desire for praise. He argues that people instinctively desire praise, but that, as they mature, this feeling develops into a desire for praiseworthiness. …. He uses that to show that what people really want is to be deservedly praised. And that turn of mind, which develops as people mature, is what makes us into people with integrity. ….”.

CommentMy problem with this fairly typical modern presentation Smith on moral behaviour is its use of the “hard wired” metaphor, which alters Adam Smith’s meaning and implies that Smith was closer to Frances Hutcheson’s theory of “innate” moral qualities, which is quite different from Smith’s theoretical contributions in Moral Sentiments.

Shiller seems to suggest that the problem is: “how to make a society work when people are completely, unremittingly selfish”. But they are not so and Shiller seems to agree when he writes: “sometimes people are completely selfish”.

If selfishness is “sometimes” expressed as a behaviour, but not always, how does it stop “society” working? And what happened to moral behaviour being “hardwired”, which metaphor implies it is “built-in” and not “loaded” separately?

Very young children might have a habit of being selfish as every parent (and grandparent) knows. If this is not corrected to some degree (or at all), what Smith called the “great school of self-command” (an idea with stoic roots) ‘kicks-in (to use an appropriate metaphor, so to speak), especially in the school playground.

Indeed, Smith elaborates later in Moral Sentiments asserting that society acts as a “mirror” (another metaphor)of which behaviours are acceptable, including in the family, relatives, closer friends, and others more distant. Those few kept away from society by events, are unaware of unsocial behaviour and have to learn it from scratch.

So what has Smith’s Moral Sentiments got to do with ‘sentiments’ being “hard-wired” (Shiller) or “innate” (Hutcheson)?

While Waiting for Dinner in an Edinburgh Library

I was early for a dinner-discussion last night with several scholars, each in their academic fields, highly knowledgeable about the moral philosophy and political economy taught by Adam Smith. Inevitably, I scanned the crowded bookshelves, mainly of 18th and 19th century well-bound volumes of books related to Edinburgh.

I came across such a 3-volume set and recognised the author as the man who replaced Adam Smith, after he had delivered his series of private lectures, sponsored by Henry Home, lawyer friend (later Lord Kames, a distinguished Enlightenment author and Scottish judge) and James Oswald (a close friend and a rising star in British politics at Westminster). These lectures were on several subjects, including Rhetoric and Belles Lettres, delivered to a ‘respectable auditory’ from 1748-51 in Edinburgh, from which Smith earned a fee of £100 per winter term (not bad for an unemployed Glasgow and Oxford graduate - though no trace of his actual formal graduation at either place is proven), near to, but not in, Edinburgh University. His audience consisted largely of that university’s students of law and theology. His lecture series established his academic reputation with the professors at Glasgow.

When Smith was appointed a Professor of Logic at Glasgow University, he finished off that winter’s lucrative course, thus delaying the start of his Glasgow lectures to the following winter term, and he handed over the lucrative private lecture series and subjects to his friend, Hugh Blair, who was about to commence a successful career at Edinburgh University (and became a popular Sunday preacher too). Blair asked Smith for his notes on Rhetoric to get him started and Smith obliged.

Blair became a popular lecturer at Edinburgh and he expanded Smith’s Rhetoric lectures, making the subject his own, and they were published in 1827. They read well and they are in a more polished style in comparison to the student notes of Smith lectures under the same title. Few traces can be found of Smith’s original text in his “Notes of Dr Smith’s Rhetorick Lectures”, found in a manor-house sale in Aberdeenshire by John M. Lothian (1896-1970) in 1961 (and published by him as Lectures on Rhetoric and Belles Lettres Delivered in the University of Glasgow by Adam Smith, Reported by a Student in 1762-63 (Nelson, 1963). These Notes were re-edited by J. C. Bryce (and A. S. Skinner) and published as Lectures on Rhetoric and Belles Lettres for the Glasgow Edition of the Works and Correspondence of Adam Smith by the Oxford University Press in 1983 (Liberty Fund, 1985).

I opened Hugh Blair’s three-volumes and out of curiousity looked them over, until the other dinner guests arrived. Turning the pages, I became curious to see how he presented his chapter on metaphors, a subject of great interest to me today because of the elevation of Smith’s use of the invisible-hand metaphor into an invented fantasy way, way beyond anything meant by Smith when he used the now famous metaphor once only in each of Moral Sentiments (1759), Wealth Of Nations (1776) and (posthumous) in his History of Astronomy (1795).

“founded entirely on the resemblance which one object bears to another … it is no other than a comparison, expressed in an abridged form.

When I say of some great minister ‘ upholds the state, like a pillar which supports the weight of a whole edifice’, I fairly make a comparison; but when I say of such a minister ‘that he is a pillar of the state’, it has now become a metaphor. The comparison betwixt the minister and a pillar is made in the mind, but it is expressed without any words that denote comparison. The comparison is only insinuated, not expressed, the object is supposed to be so like the other, without formally drawing the comparison; the name of one may be put in place of the other” (pp 342-3).

This literary explanation given by Hugh Blair of the role of metaphors corresponds well with Adam Smith’s rougher spoken words, but clearly means the same (as it still would be).

“Smith pointed that in an ideal market transaction, both sides are made better off by the result. That’s a tautology - without coercion, you wouldn’t enter into a transaction unless it would make you better off in some way. Thus, in a society where everything is done by ideal market transactions, everyone should become better off continually, day by day, with the sole (but important) exception of market failure. The latter occurs when you want to make an exchange, but can’t find anyone willing to make that exchange with you.”

CommentAdam Smith wrote some of the earliest thinking on the practice of exchange behaviour (which is fundamental to all of Smith’s Works) in particular in Wealth Of Nations in relation to bargaining. His analysis of the bargaining relationship still stands today (though not always recognised).

In the bargain, one party makes offers to the other: "Give me this which I want, and you shall have this which you want” (WN, chapter 2, p 26-7). It was on this basis that Smith regarded exchange by bargaining a positive force, compared to compulsion and slavery, of which there was plenty in evidence in 18th-century Britain.

‘jberg’ (hereafter, ‘The Professor’) drains Smith’s rich ideas of their content. There is no evidence that ‘The Professor’ has read Adam Smith (and we should note, not for the first, or last, time on Lost Legacy, that modern economists, including Milton Friedman, are not the most reliable guide sto Adam Smith’s Works).

“So if the market makes everyone better off, it follows that government intervention makes someone worse off, right? This, too, is a tautology. The essence of government is force, and you wouldn’t need force (except for basic security functions, i.e. preventing theft) unless someone did not want to do what is required.”

CommentThis was never an absolute assertion by Smith. True, he had plenty of criticism of the practice of governments in the economic management of the Mercantile society of his time (and earlier) but he had clear ideas on the need for, and the appropriate roles (note the plural) of government.

He was not so naïve as to assert ‘that [the] market makes everyone better off, nor, for the record, that ‘government intervention makes someone worse off’. A monopolist faced with competition loses sales. The Professor’s argument is like the half-serious banter found in a pub. Smith saw many positive roles for government (see the details spread throughout Wealth Of Nations – I’ve posted them on Lost Legacy more than once).

The notion that Smith somewhere said that markets always produced positive results is an assertion associated with post-War modern economists under mathematical theories of General Equilibrium by Arrow and Debreau, and popularised by Paul Samuelson, wrapped around the invention of the myth of ‘an invisible hand’.

“The problem is, Smith’s argument (like any argument) is derived from some assumptions, several of which are incorrect: the assumption of uncoerced exchange, the assumption of basic morality, and the assumption of the commensurability of values. Each of these is fundamentally wrong; let me explain!”

CommentIf exchange is ‘coerced’ it is no longer exchange, it is one party deciding the terms of the exchange instead of both parties.

Smith’s Moral Sentiments is far richer that to impute that everybody behaves with “basic morality” at all times and towards everyone else (has The Professor read Smith’s Moral Sentiments?); and “the commensurability of values”, which is unrecognizable to me as a Smithian idea (I am not sure what The Professor means by his assertion).

“Coerced exchanges. The essence of capitalism is not the market, but the wage relationship. The capitalist is different from the feudal lord or the slaveowner because he or she (or more likely it, since the capitalist is likely to be a corporation) buys labor for a wage rather than exchanging it for the right to use land or compelling it by brute force.”

CommentAdam Smith did not write about “capitalism” – he neither used the word and nor did anybody else until 1854 in English literature – William Makepeace Thackeray, in his novel, The Newcomes. Moreover, Smith’s views of the ‘joint-stock company structure, a predecessor of 19th-century corporation, were highly critical (Wealth Of Nations, Book V).

“Capitalism was only able to get going because a lot of people who had lived on the land were driven off it by the enclosure movement. Once they had no other way to support themselves, they became available as full-time wage laborers.”

CommentThe Professor now steps into economic history without watching where he is treading. Enclosures were not the cause of the drift of the landless from the land – though widespread as a belief by the uninformed. They were only one factor.

Agriculture was inefficient; it was riddled with the deadweight of primogeniture and entails, in which the wretched serfs, retainers and slaves did not live in ‘a land of milk and honey’, dancing merrily round May Poles. The professor paints a naïve picture of labourers’ lives.

The drift to the villages and towns began centuries earlier (even in Roman times), both of skilled artisans servicing several areas, and of ‘runaways’ from Feudal oppression.

The great 19th-century growth of town populations was also part of migration (from Ireland and Scotland) into England, and of Europe into the new USA, and was sustained mainly by population growth from rising real incomes and survival rates of more children of the mass of labourers.

“If you have no other way to live you have to get a job, whether you think the wages are enough or not. Workers can try to force up the wage level through collective bargaining - but if they are in the job market as individuals, it is not a free exchange; one side, the employer, can dictate the terms.”

CommentThe reality was not one of free bargaining. Laws against combinations of labour operated ruthlessly, though not against employers. There were also long-standing laws of Settlement, Apprentices Statutes, Wages set by Magistrates,Town Guilds and their monopolies, ensuring that “free exchange” did not exist. However, despite all this (and more) real wages began to grow post- 1800 and continued since.

Common labourers’ incomes rose above biological subsistence for the first time in all history (blips like the Black Death rise in real wages excepting) and the Malthusian trap in what became the Capitalist West was sprung. The rest of the world is now catching up and those countries adopting some form of capitalism are catching up faster; conversely, those that are not doing so (deliberately or institutionally), are not.

These facts challenge The Professor’s theories of the “class struggle”.

“Failure of moral limits. Adam Smith thought that abuses of the market would be prevented by the basic humanity of morality. Of course he was right to think that people are moral beings, and the vast majority of us try to do what is right, at least as we see it. Unfortunately, however, “the vast majority” is not enough. Immorality gives a competitive advantage, so the people whose behavior is not limited by moral principles - in other words, those willing to lie, cheat, and steal - tend to rise to the top. One very important reason we need government is to keep immorality from prevailing.

Comment

Adam Smith thought “abuses of the market would be prevented by the basic humanity of morality.”Not quite: where ‘abuses’ were politically sanctioned (mercantile political economy, the subject of Book IV of Wealth Of Nations - what he called his “very violent attack” on the prevailing “system”) and voted by legislators in Britain since the 16th century; they were the proper business of government to repeal. Basic morality is a thin reed to deal with “abuses of the market”. The Professor of “political science” has got it wrong again.

The Professor writes that “people whose behavior is not limited by moral principles - in other words, those willing to lie, cheat, and steal - tend to rise to the top.”

As a generalization, it is probably true, though this progression is not confined to corporate swindlers – it also applies to leaders and apparatchiks of revolutionary parties, communist, fascist/Nazis, Mullahs, military coups run by generals (Left or Right), corrupt trade union bosses, environmental extremists (they get more extreme), and theological fanatics of all religions. Smith’s answer to extremism was education and strict application of the laws of justice.

“Money can’t buy happiness. Finally, it’s simply not true that values are commensurable (i.e., that they can be measured by a common unit, which we call “money.”)

CommentI am still not sure what The Professor means by this. He may not be aware that Smith had clear views of money as a medium of exchange. He did not consider money was wealth. He firmly argued that wealth was the annual output of ‘necessaries, conveniences, and amusements of life’ (Wealth Of Nations).

The Professor’s students deserve to know all this, but they may wait in vain for him to introduce his students to the Adam Smith, who was born in Kirkcaldy, Scotland in 1723, instead of the fantasy Adam Smith invented in Suffolk in the 21st century.

Tuesday, January 25, 2011

The Economist Should Apologise

The Economist (20 January) carries an article on growing inequality (anonymously, as per the paper’s policy). (HERE): "Does Inequality Matter? If so, how?"

“The claim that inequality now matters more because of brands and status competition may turn out to be more robust. Such concerns could seem peripheral compared with global woes such as poverty. But inequality is local. As Adam Smith also once wrote, “if he was to lose his little finger tomorrow, he would not sleep tonight; but provided he never saw them, he would snore with the most profound security over the ruin of a hundred million of his brethren.”

CommentFollow the link to read the article’s argument (it answers ‘yes’ to both questions).

However, the author’s part quotation from a paragraph in Adam Smith’s “Theory of Moral Sentiments” (1759) and I am surprised to find it misquoted in this way in The Economist.

The partly quoted paragraph purports to show that Adam Smith disregarded the suffering of “his brethren” in distant China. The implication is that not much has changed today regarding inequality.

However, the rest of the paragraph (unquoted) presents, unambiguously, the opposite picture, and absolves Adam Smith:

“To prevent, therefore, this paltry misfortune to himself, would a man of humanity be willing to sacrifice the lives of a hundred millions of his brethren, provided he had never seen them? Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. … It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.” (TMS III.4.4: pp 137-38.

Monday, January 24, 2011

Adam Smith On Command Over Labour

I re-opened my laptop and found the following item saved and ready for posting but for some reason I left it out (among some other posts), so, better late than never, I post it today.

“Randall” contributes to a “debate” in The Standard (New Zealand) a ‘collective’ who ‘share a commitment to the values and principles that underpin the broad labour movement’. It shows Psychopaths make the best capitalists (HERE):

He writes:

“as the great adam smith opined in his theory of moral sentiments the thing that most humans desire is command over labour. i.e. they want to be the boss. in other words they have a psychological desire to cover their own inadequacies by dumping on others. nasty but true and the recored in New Zealand bears it out.”

CommentYes, I know. It’s a silly debate among a bunch of dreamers, and not worth bothering about. But “Randall” is so crass he hasn’t understood that which he writes about. He parades his supposed command of Adam Smith’s ideas by slipping in “his theory of moral sentiments” and getting those ideas completely wrong.

Smith’s point was that by producing one’s own product or delivering one’ own service in an exchange-driven commercial society, one seeks to have command over the products of other people’s labour.

That is not the same as “they want to be the boss”. Rather, they want to be an exchange partner of others, transacting for the products/services produced by others by “truck, barter, or trade”.

Randall should look at himself for signs of a “psychological desire to cover their own inadequacies by dumping on others”, in this case, Adam Smith.

At a minimum, Randall should read and understand Smith’s books. I am sure that this admonition is among the “values and principles that underpin the broad labour movement” in New Zealand, and in the prouder traditions of its Labour Movement.

Saturday, January 22, 2011

Adam Smith: Research Notes, No. 1

I was searching the extant records in the Scottish National Archives for historical information on the Canongate church, where Adam Smith is buried in Edinburgh – a few yards from his home from 1778-90 in Panmure House – which, while relatively fruitless due to the many years of the records that have not survived - I came across a brief note of his burial and nothing else:

I was looking for information about his mother, Margaret Douglas Smith, who died in 1784, and for whom we have no information about the whereabouts of her grave. That year is one of the many years not preserved in the archives. I shall try next to see if there are any records of St Brides Church in Kirkcaldy, on the grounds that her family were prominent farmers around Kirkcaldy, Fife, and she may have preferred a burial nearer her home county, because there were more relatives there who were available for tending to her grave. But given Adam Smith’s ties to his mother, I would not think Smith would want her grave too far from his home.

The same research considerations apply to the unknown whereabouts of Janet Douglas’s grave, who was housekeeper for many years for Smith and his mother at her different homes in Kirkcaldy, Glasgow and Edinburgh.

One thing worth mentioning about these records is that they provide an insight into the life of the community which the Parish church provided in the 18th century. First, among the burial records the overwhelming preponderance of baby and infant deaths cannot help but be noted. Second, in the records the number of times which the Church minutes refer to the moral discipline imposed by the worthy elders – several of them who were Baillies from the local Town council.

‘Fornication’ was a fairly regular offence reported to the elders, as were the number of ‘Bastards’ noted in the Parish (“no less than 15” in one entry). Marriage didn’t protect those whose date of marriage was shorter than a nine-month pregnancy. If it was, they were required to accept the censure of the Church ‘hoping to be restored “ and having confessed their faults” in “the sight of God”, they were restored to their “Church privileges” (unspecified).

I shall return to report on these and similar topics at later dates. The Church also features in my research for “Smith on Religion”, a chapter in the forthcoming volume, edited by Chris Berry, Maria Paganeli, and Craig Smith for Oxford University Press, in September 2011.

Adam Smith on History, Not the Future

“In 1995, I published a book called The World After Communism. Today, I wonder whether there will be a world after capitalism.”

CommentOne thing is for sure when we read pieces like this speculating or predicting the future, they have a low probability of the future ever turning out like such authors envisage. Adam Smith, for instance, was careful not to make many predictions; he looked backward to explain how the present arrived, taking a long-view of the past.

He saw the Britain he lived in as the Age of Commerce. He had no vision or inkling of a future capitalism (he didn’t know of the word). He was somewhat dismayed when the past had not followed the line of logical progress that he had envisaged for societies. Agriculture had not followed his hypothesis that agriculture should first ‘improve’ completely before manufacturing expanded, while the self-evident failings of the joint-stock company structure represented by the corruption-ridden East India Company were, in Smith’s view, enough to deter such institutions from taking root, though they were the means by which capitalism thrived from the 19th century.

Robert Skidelski, a highly literate and civilized intellectual (author of an impressive biography of Keynes), ventures to present our unequal society as being unsustainable, contrary to the evidence of millennia after those small settlements that emerged from the Ice 11,000 years ago, in the near Middle-East fertile crescent, to finally leave the property-less Age of Hunting for the property-driven Ages of Shepherding and Farming, became and remained unequal. They passed from time-to-time through many changes, but did not change their increasing inequalities, despite occasional reversions to a near equality of destitution from war and banditry.

However, what Smith, in another context, identified ‘a lot of ruin’ in a nation, was experienced many times in countless episodes – once a sustainable subsistence become possible, localized difficulties did not obstruct its spread across Europe to Roman times. Meanwhile, the Age of Commerce had arrived (‘at last’, Smith told his students in his Lectures On Jurisprudence).

“Capitalism may be close to exhausting its potential to create a better life – at least in the world’s rich countries.By “better,” I mean better ethically, not materially. Material gains may continue, though evidence shows that they no longer make people happier. My discontent is with the quality of a civilization in which the production and consumption of unnecessary goods has become most people’s main occupation.”

CommentsWho decides what at are “unnecessary goods”? Surely not distinguished Professors in line for well-above average pensions? Try cutting their support staff, or, in my experience, their free parking privileges – even when I suggested, uncharacteristically in a bout of neoclassical price rationing, that scarce spots be auctioned to the staff who valued them most.

I recall reading a 3-volume biography of President Johnson (by Robert Caro?) about an electricity law he sponsored to compel the electricity generating companies to widen the distribution of their transmission lines to take-in those homes miles from the shortest distance between the main towns, and the effect this had on the millions of homes up-country where the women hand-washed the dirty clothes of the men-folk at some great personal physical cost to their health, ageing and degree of fatigue (the author was hardly, to coin a phrase, whitewashing President L. B.Johnson, but it was enough to shame the arrogance of male porcine chauvinists). Are washing machines a necessity or a luxury we can do without? Depends if you do the washing.

The fact is that since the first claim was staked on property in the forest societies, our ancestors all came into inequality, which was and remains the price paid by societies that produce the ‘necessaries, conveniences, and amusements of life’ (Adam Smith). Those that consider it appropriate to try to stop this process would have to exercise a wholly unacceptable destruction on an enormous scale involving billions of people to drive the survivors back to the living standards of the first age of man. Not that this is Robert Skidelsky’s intention – he’s far too enlightened to contemplate that as an acceptable outcome, especially as there is so much more to do to lift what is still “a large part of the world out of poverty”. He asks: “Do we spend the next century wallowing in triviality?”

Prolonging the pampered life of a super-rich person by highly-expensive surgery on the frontiers of medicine may seem a needed correction to the distribution of health measures across parts of the world where millions don’t live long enough to reach maturity, their short-lives hardly fulfilling or comfortable, but the political arrangements necessary to do something about the former would not do anything about the latter. The world needs more capitalism, not less.

“But socialism, in its classical form, failed – as it had to. Public production is inferior to private production for any number of reasons, not least because it destroys choice and variety. And, since the collapse of communism, there has been no coherent alternative to capitalism. Beyond capitalism, it seems, stretches a vista of…capitalism.”

CommentMaybe, yes.

“Adam Smith, for example, recognized that the division of labor would make people dumber by robbing them of non-specialized skills. Yet he thought that this was a price – possibly compensated by education – worth paying, since the widening of the market increased the growth of wealth. This made him a fervent free trader.”

CommentIt wasn’t the division of labour that made people “dumber” – his example of the pin factory was used to illustrate the fact of rising labour productivity, but his more important example, continued in the same chapter of Wealth Of Nations, was to show the growing complexity of the long supply chains needed to produce a day labourers “common woolen coat”, which showed how the division of labour had enhanced the supply of the “necessaries and conveniences of life” that could be found in the same labourer’s home, certainly when compared to an “African prince” who held the “live of ten thousand” naked hunter-gatherers at his disposal.

Moreover, Smith shows in Book V of Wealth Of Nations that the cause of mindless stupidity was the non-education of the children of each generation of labourers, set to work for a few pence a day from 6-years old without any schooling in “reading, writing, and account”, and then face a lifetime of continued ignorance, and prey to whatever “enthusiasm”, political or theological, the prospect of which might frighten enough ‘fearful’ and richer, readers into authorizing “little schools” on the Scottish model in the 60,000 parishes in Britain that could do something about those children (the majority) bereft of the necessaries or conveniences of education.

“Today’s apostles of free trade argue the case in much the same way as Adam Smith, ignoring the fact that wealth has expanded enormously since Smith’s day. They typically admit that free trade costs jobs, but claim that re-training programs will fit workers into new, “higher value” jobs. This amounts to saying that even though rich countries (or regions) no longer need the benefits of free trade, they must continue to suffer its costs.”

CommentNot quite But first of all the poorer regions certainly “need the benefits of free trade”, currently effectively locked out of the richer countries (the EU and US predominantly) from life-saving food markets protected by tariffs and pampered rich-world agri-business interests.

The development of the poorer countries, forces “richer” countries to change from manufacturing to “services”, in exchange for low-cost manufactures from formerly poorer countries. They also “waste” scarce capital on protecting agriculture, from funding wars, and with unaffordable non-targeted welfare schemes. In the 18th century, wars were about dynastic succession; in the 21st century, wars are about exporting Western models of government and associated regime changes.“Capitalism’s defenders sometimes argue that the spirit of acquisitiveness is so deeply ingrained in human nature that nothing can dislodge it.”

CommentAdam Smith was of the view that the “urge to self-betterment” was a powerful motivator. That motive is unlikely to alter quickly, if at all. Any culture, and any religion or political passion that seeks to eliminate or punish that motivator is not likely to succeed this side of tyranny.

“Indeed, the “spirit of capitalism” entered human affairs rather late in history. Before then, markets for buying and selling were hedged with legal and moral restrictions. A person who devoted his life to making money was not regarded as a good role model. Greed, avarice, and envy were among the deadly sins. Usury (making money from money) was an offense against God.”

CommentWhat the preachers preached was never really practiced by the people in the institutions that organized the sermons; every religion and political passion becomes compromised by its adherents falling well short of their ideologies.

“It was only in the eighteenth century that greed became morally respectable. It was now considered healthily Promethean to turn wealth into money and put it to work to make more money, because by doing this one was benefiting humanity.”

Comment“Greed” never became “morally respectable”, except within the range of “free speech” (Bernard Mandeville). The same “free speech” led Marx to formulate his “M-C-M” hypothesis, that’s all. 19th-century literature was not unique in its tales of “greed”, proceeded as it was by Shakespeare, Defoe, etc., and the machinations of Roman and Greek times. “Greed” was (is) acceptable to the greedy as tyranny is to tyrants; it was ever thus.

“Perhaps socialism was not an alternative to capitalism, but its heir. It will inherit the earth not by dispossessing the rich of their property, but by providing motives and incentives for behavior that are unconnected with the further accumulation of wealth”

CommentWell, we’ll see. Robert Skidelski is an honest and moral, man. However, that praiseworthy condition is no protection from disappointment, nor from inconceivable future tyrannies.

Socialist motivation in rebellions is to capture the levers of state power and, usually violently, redistribute the fruits of state resources to themselves and their constituencies, the people in which are not expecting to be cut off from continuing rises in their living standards.

Wednesday, January 19, 2011

Using the Invisible-Hand Myth to Bash Markets

“Capitalism, Market Fundamentalism, and the Duplicitous Meanings of Democracy”

“Private ownership of the means of production and the invisible hand of the market are two key components of modern capitalism. In reality, there is no ‘invisible hand’ of the market, as the proponents of free market capitalism contend. If there were, the global banking system would have collapsed long ago. We have only to lift the cloak of secrecy for the human fingerprints of manipulation to become plainly visible. A small cadre of the elite is manipulating everything.”

CommentThis is from a leftish Blog that believes the ‘ruling class’ runs everything, so it is not exactly a recantation from those responsible among academic economists for the myth of ‘an invisible hand’, leading even ‘selfish’ capitalists and as selfish consumers to the wonderful miracle of benefitting society, and to the even more miraculous outcome of perfect harmony between what suppliers supply and consumers want to consume.

The Left does not believe in the invisible hand (at least not since Oscar Lange tried to adopt the idea (circulating in Chicago in the 1930s) in 1938 and 1946 that it was something claimed by Adam Smith for free markets (It wasn’t, but that’s another and longer story), which in Lange’s view could be better performed by socialist planning in the Soviet Union, and in post-war Poland, later taken over by the Red Army.

This was followed by a staunch, rival claim from Paul Samuelson (of Chicago and MIT) in 1948 that the ‘invisible hand’ was Adam Smith’s “central idea”, applicable to perfect-market economies and, later, allegedly proved by Arrow and Debreu in advanced General Equilibrium mathematics.

Since then, the myth of Adam Smith’s ‘invisible hand’ has spread like a meme into the unthinking intellectual apparatus of graduate economists and the media/political/lobbying hordes who pass for informed opinion.

That the invisible-hand does not exist is not disputed on Lost Legacy. It never existed, and Smith’s use of the metaphor had nothing to do with what the post-late 1870s academics made of it.

That the invisible-hand had anything to do with the current crisis in state-managed capitalist economies is disputed. Metaphors do not have operational roles in the real world. Asserting that they do, literally is nonsense and an ideological alibi, in Bear Market News, to bash markets.

Monday, January 17, 2011

Claims for the Invisible Hand Fail Simple Tests

“On many occasions, I have asserted that I no longer believed in Adam Smith’s ‘invisible hand’, arguing that even if it still existed (as I think it does), it no longer acts freely and independently and can be and is being channelled by corporate managers and public policymakers (which subverts the concept entirely). In fact, many a time I’ve made policy suggestions which focus on manipulating Adam Smith’s hand. I might not have articulated it as so before, but the point is that this ‘hand’ is now a ‘visible’ one now….

In Adam Smith’s time, markets ran on the craft economy. Businesses were small-scale, goods and services were produced ad hoc and often with the same craftsman working on every stage of its production. Mass orders did not happen because no one could afford them, the notable exception being the military during a war, and that spawned an entire body of military study on how to manage and mantain arms supplies….

… So for Adam Smith, the whole idea of the ‘invisible hand’ worked perfectly. Small producers, small consumers, weak regulation and lack of information infrastructure made moot by the small reach of the market anyway; if the only folks buying their pots at the ones living in the same small town as you are, word of mouth is generally sufficient to facilitate market activity.”

He adds that “it no longer acts freely and independently” which “subverts the concept entirely”.

So it is a “concept’ (that is, in the mind) either made-up and imagined but not physically present in some sense.

This is a muddle. Best shown by Piaroh-Cze’s construction: the invisible hand’ exists if he thinks it does, but doesn’t if he thinks otherwise.

The muddle begins from his assumption of meaning of the metaphor of “an invisible hand”. Metaphors do not exist in any real sense. They are grammatical constructions of the literary mind.

In so far as Adam Smith used the invisible-hand metaphor (IH metaphor) it most certainly did not exist physically, therefore to say “it no longer acts freely and independently” is physically not possible one way or another. What might change is the imagination of the concept which “no longer acts freely and independently” and that judgement exists only in the mind.

Adam Smith has no confusion about the status of the IH metaphor. He taught his students about the role of metaphors: they are used to “describe in the more striking and interesting manner” their objects (Adam Smith, “Lectures on Rhetoric and Belles Lettres” [1762-3] 1983, p 29).

He only used the IH metaphor in this manner three times in his Works, his Theory of Moral Sentiments (1759), his “Wealth Of Nations” (1776), and in his History Of Astronomy (1795 posthumous, but believed to have been written from 1744-50).

From the context, Piaroh-Cze apparently believes that the IH metaphor has something to do with markets, and is applicable today. This is a fable invented from the 1950s by modern economists and repeated endlessly and widely even today (see Paul Samuelson, Economics: an analytical introduction, McGraw-Hill, 1948, p 36).

BUT SMITH’S THREE USES WERE NOT METAPHORIC IN REFERENCE TO MARKETS.

His use of the IH metaphor in his History of Astronomy was about the belief on Roman citizens that their (invisible, but represented in stone) god, Jupiter, fired thunderbolts with his invisible hand at enemies of Rome – certainly a ‘more striking and interesting manner’ of expressing its object within, what Smith called, their “pusillanimous superstition”. But nothing to do with markets.

In Moral Sentiments his use of the IH metaphor was about how rich and unfeeling landlords in feudal Europe fed their retainers, serfs and slaves, who, with their families, otherwise would die of starvation and who, then, would work their fields and keep out intruders (and who would keep the poor at bay, and also lordly rivals?) – which meant that the landlords had to share their harvests with their much despised underlings, just as much as servants, serfs, and slaves had to work to get fed). The IH metaphor referred to the consequences of this necessary mutual dependence, policed by the Feudal Lord's power and oppression. But, again, it had nothing to do with how markets work.

In Wealth Of Nations, some merchants, but not all, obviously, traded with and invested in the colonial settlements in North America, the Caribbean, Africa, and India, but others preferred to invest all their capital at home, where it was under their immediate control, rather than risk it by sending it abroad and at the mercy of events (shipwreck, piracy and war) beyond their control. The merchants also distrusted people they did not know and who were not subject to UK justice. Therefore, they invested solely in the domestic economy, but in doing so, unintentionally they added to domestic revenues and employment (public benefits in Smith’s view). He used the IH metaphor to describe ‘in a more striking and interesting manner’ the consequence of their risk aversion leading to this public benefit, without making any reference to how markets work, or to greater ‘harmony’ or to the ‘magical’ distribution of the benefits. It was simply the arithmetic rule that the ‘whole is the sum of its parts’.

In no way can it be construed from these reference that the IH existed or that “for Adam Smith, the whole idea of the ‘invisible hand’ worked perfectly”. The metaphor applied to its object of the insecurity felt by some merchants that "led" them to act as they did. But nothing to do with how markets work.

Hence, the assertion that whether the IH metaphor physically exists or not, in Adam Smith’s thinking, was not and is not dependent on the existence or nature of markets. Piaroh-Cze presents an idealistic picture of markets in Smith’s time that “ran on the craft economy. Businesses were small-scale, goods and services were produced ad hoc and often with the same craftsman working on every stage of its production.” [Incidentally, early craftsmen did work on 'every stage of production.)

The reality was quite different. Smith dissected the commercial system in Britain, dominated and distorted, as it was, by mercantile policies against which he launched his “violent attack” in Wealth Of Nations. The Elizabethan Trades Guilds that ran legal monopolies of almost everything sold in towns; the Apprentice Statutes, the Settlement Acts, the Royal Charters granting monopolies across all businesses, plus the tariffs and prohibitions, and Cromwell’s Navigation Acts, inheritance, specially landed estates, of primogeniture and entails, the Combination Acts against labour but not against employers, and the patronage and corruptions of governments at all levels, these , all conspired to paint a different picture that markets “worked perfectly”. They didn’t and still don’t.

Piaroh-Cze’s case fails the historical test of the facts, and also fails any test of reading Adam Smith’s actual Works.

Further Comments on Jeff Weintraub and Adam Smith's Explanations of Rising Real Wages

Dear Jeff Weintraub

Thank you for your interesting response to my comments on your debate with your students (incidentally, I admire your excellent scholarly dialogic debating style, intended to help your students think for themselves rather than just thoughtlessly accept what they are taught).

Incidentally, I was unable to send my comments direct to you because I could find no contact email address on your site (mine is: gavink9ATgmailDOTcom).

I accept that among the requirements of teaching about the classical economists it must include covering Ricardo et al, and it is clearly necessary to be comprehensive. However, I find the inclusion of Ricardo in discussions of Adam Smith’s meanings is often, at least for me, exasperating, as Ricardo’s theoretical ‘improvements’ showed he had a quite different understanding of what Smith’s political economy was about. Ricardo is popular as a ‘theorist’, with several modern economists, with whom I maintain friendly relations (e.g., Terry Peach of Manchester), but I find the gap between Ricardo on Smith’s historical approach is near impossible to bridge (though, of course, that is no reason ever to fall out over it).

I am sure that we would agree on quite a lot about Smith if we were in the same room. If it comes down to explaining “whether Smith has a satisfactory theoretical explanation for how and why …. in a market economy… [it produced] … a broad-based improvement in most people's standard of living”, I would start with what Smith was saying and never, from bitter experience, with what modern economists, including Ricardo, say he said or meant.

I must defer to you in agreeing that he did not state his ideas or method explicitly in a manner acceptable to modern theorists. There are explanations in WN, but it is wrapped-up in non-formal language, and we have to dig it out, so to speak. It is worth the trouble of doing so. Better that way in my view than adopting ‘theoretical reasoning’ that turns out to be wrong (biological subsistence only) and ‘clarifiers’ used to predict immiseration.

The view outside Ricardo’s windows (and from Marx and Engels’s even loftier perches) was quite depressing and misleading. The new urban, not to say wretched, poor were growing faster numerically from immigration (Ireland) and the ‘attraction’ of the cities from the land (then no rural paradise, to put it mildly) than the capacity of new forms of manufacturing and trade activities to provide employment, from which real incomes could rise (6p a day for six year-olds beat nothing a day). Though evidence of rising real incomes from 1760-1860s onwards conforms to the historical trends identified by Smith. This often, but not always, miserable introduction to the commercial economy is an experience all too familiar in parts of the world today, which many ‘westerners’ do not appreciate – our ancestors paid their heavy ‘admission’ price to the Age of Commerce, not us.

Output was sold to the population in ever-greater amounts with slowly rising quality (differentiated, of course, across the income classes). Take a simple indicator: the growth in the manufacture of ‘conveniences and amusements’ in the form of children’s toys from the 1750s onwards. What somebody earned as wages from making, they spent to purchase other ‘necessaries and conveniences’, and, on occasion, second- or third-hand ‘amusements’ of life. [Smith in WN reports that King James VI and 1st’s former wedding-bed was an ‘ornament’ at an alehouse in Scotland (WN II.iii.39: 347).]

All this, and much else, was over-shadowed by all the very real oppressive social interventions, despite which, market relationships had produced and continued to produce broad-based, if initially minute, improvements in growing numbers of people's standards of living over several decades and centuries. The Malthusian trap was foiled for the first time in millennia. There were, however, many laws and political barriers left to reform – most waited until the 20th century, but much are still with us, plus plenty of new ones.

There was also ‘middle-ranking’ (‘wives of Aldermen’, TMS I.iii.2.6.8: 57) rank, place and prejudices operating against common folk getting ‘above themselves’ and imitating the dress sense and habits of their ‘betters’ (mocked by US folk lore in ‘Yankee Doodle’ and his feathered hat, which he called ‘Macaroni’; unhappily, a most unlikely scene in 18th-century Scotland).

As small manufacturing gave way to workshops, and the numbers of skilled labourers increased, plus new trades (mechanization) and new supervisory posts proliferated, real incomes increased for new occupations. The Mechanics Institutes movement (teaching young artisans to work with new skills in chemistry, physics, maths, and designs in the new industries) began to appear in the 1800s (among them the predecessor of Heriot-Watt University in 1821).

The ‘pinhead’ example should be placed in context. New working methods required new mechanical apparatus (beautifully illustrated and detailed in Diderot’s Encyclopedia, 1751-77), which required new manufacturing capacity, and was a process that grew and accelerated in new industries from then on. These cost more – much more after steam power was harnessed – with higher demand for the necessary skills and education to design and make them. These also raised the real wages of new grades of labour and undermined the survival-only subsistence pessimism of Ricardo (and Malthus). Increasing, not decreasing, returns to scale became a feature of the non-agricultural economy, not really challenged until the 1920s, nor really integrated into growth theory until Romer in the 1980s – so much for ‘theorists’ not catching up with the real world.

The absence in Smith of a ‘theoretical explanations’ for all these events in the real world is worth setting good students the task of thinking about (it should make them even better students). But I am wary of changing from ‘what works in practice, but may not work in theory’ (Adam Smith’s political economy) into an exercise of adopting something that ‘works in theory, but definitely does not work in practice’ (including the dead-end of diminishing returns). However, I accept your challenge and will return to the subject in due course.

I am glad that I spotted your article and was able to join a debate if only from the sidelines. Good students deserve good teachers, and on this evidence, fortunately, Daniel Albornoz and David Kanter, have found one.

Jeff Weintraub Responds to the Debate

TO FOLLOW ALL 2083 POSTS
(AND COUNTNG) FROM HERE TO 2012 AND BEYOND, PLEASE USE THE NEW ADDRESS.

THANK YOU

Gavin Kennedy

Jeff Weintraub sent the following letter to me via Mark Thoma's "Economists View" (see my earlier post which was picked up by a couple of other Blogs. I am always pleased when other Blogs re-post from Lost Legacy - with acknowledgement, of course - and always relaxed about comments, critical or otherwise. This is an educational Blog, not a fount of fixed ideas - 'good reason must give way to better' (apologies to Shakespeare - though the character speaking thus, dies in the next Act).

"Dear Gavin Kennedy,

I just happened to notice your two-part response to my blog post about the theoretical puzzle posed by Adam Smith's theory of wages and "universal opulence":

• Was Adam Smith Wrong on Rising Real Wages And the Spread of "Opulence"?

(Most of your second post was then re-posted, with a bit of further commentary, by Mark Thoma in his Economist's View blog... and someone forwarded that to me.)

I appreciate the friendly and gracious character of your response to my post, which includes many interesting and intelligent points.

On a number of these points we probably agree more than you may have realized—e.g., the richness and complexity of Smith's analysis of the division of labor, and its central role in his whole theory of society and socio-historical development, which certainly cannot be reduced to Smith's discussion of what I like to call the problem of "pinheadism" in Book V of The Wealth of Nations. I also share your evident exasperation with the fact that many people who talk & write about Smith, whether to cite him reverentially or to criticize him, have clearly never taken the trouble to actually understand his arguments in WN ... or even to read the book. Of course, I further agree that Ricardo is a far narrower, less profound, and infinitely less interesting and illuminating thinker than Smith, so that reducing Smith's economic theory to Ricardo's (intentionally or naively, explicitly or in effect) generally leads to confusion ... and that an ahistorical approach to Smith and the issues he addresses (an approach shared by Ricardo and by the vast majority of contemporary economists) distorts both Smith's arguments and socio-economic realities. (My P.S. about Ricardo may have inadvertently given you the wrong impression in that respect.) Smith was, among his other strengths, a brilliant and insightful historical sociologist (along with several of Scottish Enlightenment peers), and ignoring that dimension of Smith's work produces misleading caricatures of his perspective.

Having said all that, however, honesty compels me to add that in my (possibly fallible) opinion, your response fails to address the key theoretical issues raised by my discussion with those two students. Among other things, the central question that both the students and I were addressing in that particular exchange was not whether Smith was or wasn't right historically in expecting that economic growth in a market economy had produced and could continue to produce a broad-based improvement in most people's standard of living, but whether Smith has a satisfactory theoretical explanation for how and why this should happen. I may be wrong, but I don't think your response ever really confronts that question directly or effectively.
And in that connection, by the way, one point I tried to convey (tactfully) to my students was that the problem of pinheadism (which they emphasized, but which I didn't) is of secondary importance. As I said, if we accept Smith's warning in Book V that the "progress of the division of labor" means that the work performed by most workers, "the great body of the people," becomes increasingly narrow, specialized, simple, and mindless (WN pp. 781-782). then that would sharpen the conundrum. But as I also tried to indicate, the theoretical roots of the conundrum go deeper (which explains why Smith tries to address and resolve it in Book I of WN, in the manner I outlined). So even if we dismiss the problem of pinheadism completely (and I'm not sure we want to do that completely, for reasons that would require a separate discussion to explain, but let's assume for the sake of argument that we do), the conundrum wouldn't simply go away.

In short, my considered opinion (which may or may not be entirely fair or correct) is that your response (along with Thoma's additional commentary) largely misses, or talks past, the central theoretical issues I was raising in that particular discussion. Right now I don't have time to spell out my reasons for thinking that beyond the remarks I've already made ... but I'll try to do that more fully and systematically sometime soon.

Meanwhile, I wanted to acknowledge and thank you for your gracious, intelligent, interesting, and usefully thought-provoking response to the item I posted.

Yours for the republic of letters,

Jeff Weintraub

P.S. Speaking of the division of labor ... Smith's analysis of the division of labor is so rich and intellectually significant, and is so crucial to his whole theory of society and socio-historical development in The Wealth of Nations (which, of course, is far more than just a treatise in technical economics) ... that I have often felt that an equally appropriate title for the book might be The Division of Labor in Society (to borrow a title later used by Durkheim).

IMPORTANT: Adam Smith's Panmure House Project in the Bureaucratic Balance

“LIKE so many dreams that turn to nightmares, it seemed a good idea at the time. Three years ago this spring, the Edinburgh Business School offshoot of Heriot-Watt University appeared to have pulled off a coup.

Bill Jamieson hopes plans for Panmure House, which was rebuilt in 1956, are approved soon It won a bid to buy the house, just off Edinburgh's Royal Mile, where Adam Smith spent his last years. Panmure House in the Canongate, close by the churchyard where the philosopher is buried, had fallen on bad times. Edinburgh City Council was glad to be shot of it – and the contingent costs of saving it from its dilapidated state. Panmure House and its heritage is one of Scotland's treasures, and its neglect a national scandal. This was not just a home to one of Scotland's greatest thinkers and philosophers. It was the epicentre of the Scottish Enlightenment. Smith's dinner guests at Panmure House on Sunday evenings included Adam Ferguson, widely regarded as a pioneer of sociology; William Robertson, Principal of Edinburgh University and Moderator of the Church of Scotland; Joseph Black, a chemist who discovered Latent Heat; Edmund Burke, philosopher and politician; John Hume, playwright and brother of Smith's famous friend, the moral philosopher and historian, David; John Adams, architect and designer of splendid Georgian buildings in Edinburgh, and John Playfair, Professor of Mathematics at Edinburgh. Here was an opportunity for an ambitious restoration befitting the greatest contributor to the Scottish Enlightenment, one that would bring the building back to life as a research and meeting centre. Heriot-Watt, which paid £800,000, quickly saw that here was a building that could be used, not just displayed, that would be a centre for debate and discussion, not just a storage archive. And that absolutely suited the council's stipulation that the building be used for educational purposes. The intervention was widely hailed in Scotland. And news travelled fast round the academic world. The American Economics Association expressed keen interest. Before long, Heriot-Watt had attracted offers of help towards refurbishment totalling a potential £3 million. Here at last, not only would the author of The Wealth of Nations be properly honoured, but the university would also have a research centre and seminar facility in the heart of the capital that would attract visitors from across the world. Today, almost three years later, not a brick has been laid or even a path cleared. Panmure House remains padlocked and abandoned. The best-laid plans have come to nothing. And Heriot-Watt is now staring into a financial black hole. Panmure House is on the brink of turning into a doomed and disastrously expensive foray into heritage bureaucracy. The fate of the project – delayed by obstacles, clashes and delays – now hangs precariously on the outcome of a public inquiry on 3 March.

How has it come to this? It is an irony that Adam Smith himself would have appreciated, that a gesture to rescue and revive a building abandoned and forgotten for years has suddenly attracted health and safety, heritage and aesthetic interventions bringing delay and despair. Heriot-Watt, says Sir Alan Peacock, economics guru and co-author with Gavin Kennedy, Emeritus Professor at the Edinburgh Business School of a paper on the cultural importance of Panmure House, "has been put through all the hoops".

Barely had the university begun considering outline plans for refurbishment and renewal than building inspectors insisted on appropriate facilities for disabled access. Heriot-Watt's architects EK:JN duly obliged. By March 2009 they presented plans for a new octagonal stair tower and a turret, offering disabled access, modelled on Ford House in Midlothian.

Enter Historic Scotland. It made a site visit and immediately wrote to the city council expressing "strong concerns" over the plans. EK:JN then submitted further proposals in July of that year for the extension of the building. This featured a glass atrium extension to enable it to be used as a meeting place with lecture facilities, in compliance with the council's stipulation. This, as Keith Lumsden, director of the Edinburgh Business School at Heriot-Watt explained, fulfilled both functional requirements and opening up the original stonework to view. Historic Scotland again objected. Steven Robb, senior inspector of historic buildings, wrote that the atrium and stair would affect the character and special interest of the building "to an unacceptable degree". The plan, he said, would alter the entrance elevation, adding that an external stair was not essential to its reuse. These concerns were repeated in a further letter by Historic Scotland to the council in August of that year. But these objections, Lumsden argued, would make it impossible to develop the house as a seminar centre and meeting place with all the facilities that would be required.

Six months later, in March 2010, Heriot-Watt's plans were formally considered by the city council. Its planning department had recommended refusal. But the planning committee overturned this after a site visit, voting decisively 11 to one in favour.

Barely had the applicants time to celebrate this progress than on 13 August Scottish ministers called in the proposals for examination. Heriot-Watt, sensing that this would prove not the beginning of the end but the end of the beginning, demanded a public inquiry. It believes it has a cast-iron case and a compelling proposal that would bring the crumbling Panmure House back to life, providing an academic magnet at the heart of the city.

What lies at the heart of Historic Scotland's objections? Is it being over fussy, or are there valid concerns? Panmure House was built between 1691 and 1693 by Lt Col George Murray, who sold it in 1696 to James Maule, 4th Earl of Panmure. It passed to the Earl of Dalhousie, a relation. Adam Smith rented the building from 1778 until his death in 1790. It was a two-storey building with basement and attic. A rental agreement of 1753 describes it as having a large dining room and drawing room (ground floor), three good bedchambers with closets and conveniences on the same floor and a basement kitchen below.

As a building it has since been through the wars and there is little now that has survived the time of Smith's occupancy. In the 1840s the northern wing was removed. When the area became industrialised, the grounds were occupied by the Panmure Iron Foundry. By the 1950s the building, according to a Historic Scotland summary, "was ruinous, vandalised and only stone stubs of the internal stair remained." In the mid 1950s the architect John Wilson Paterson converted it for use as a home for delinquent boys, the floors at ground and first floor having already disappeared.

In 1970 the building was Category A listed.

Historic Scotland's concerns are not without merit. This is a rare example of a 17th-century town house within the historic Old Town. The original stone structure presents a sturdy frame. But virtually everything that was within at the time of Smith's occupancy has long gone. It was abandoned, then made over in the 1950s, then abandoned again. What's left is less artefact than association. The case for preservation cannot rest on architectural merit: the building has been internally gutted. So how much of this objection is on heritage grounds – and how much on aesthetics?

The surrounding built environment is very mixed and cannot be said to hold to a particular style or vernacular. The building is shielded from the Canongate by a circa-1930 tenement block providing undistinguished, if not grim, "infill" development. There are also some tenements by Sir Basil Spence, an acquired enthusiasm for many. As Panmure House is not visible from the Canongate, its appearance does not bear on the thrilling Hanseatic style of the Royal Mile as one looks up towards St Giles. As for looking down to Holyrood, there is of course the Scottish Parliament: a building that will forever struggle to avoid that most searing thunderball of condemnation in the entire Edinburgh lexicon of put-down: "inappropriate".

There is the gem of a charming little garden nearby in Dunbar Close, laid out in the formal 17th-century style by Seamus Filor in 1976, but barely known or visited. A refurbished Panmure House would bring fresh interest.

Historic Scotland does have an important role to ensure that as much as possible of the original building is preserved. But specifying what should constitute "re-use" is surely not in its bailiwick. And the dismissal of the disabled-access turret smacks of subjective judgement.

The key point here surely is that this is a historic building transferred on the understanding that it would be used for educational purposes. It has to cater for events and meetings and not just be an archival museum. Heriot-Watt paid £800,000 in good faith and has mustered funds to meet that obligation. What it has submitted is no golden arches McDonald's restaurant or a sprawling and distraught Catalan indulgence, but a refurbishment and extension that serves functionality while opening up the building to wonder and inspection. It has stepped up to provide an immense enrichment to the legacy of Adam Smith where a neglected structure now stands. And it would be an inspiring addition to the city's cultural meeting points that would draw international attention. But the fate of the entire project now dangles at the end of a planning inquiry. The Wealth of Nations offers no guidance on the conduct and function of such inquiries. But I suspect the author would have looked on this three-year episode at the heart of Scotland's capital city – and wept.”

Saturday, January 15, 2011

Was Adam Smith Wrong on Rising Real Wages And the Spread of Opulence"?

Jeff Weintraub, a professor at the Universities of Pennsylvania and Haifa, opens a helpful discussion on a “theoretical conundrum” that two of his (undoubtedly bright) students raised with him about Adam Smith’s “optimism” on the market raising real wages among the poor as an outcome of “progress towards opulence” (HERE).

Jeff Weintraub direct his responses at the apparent ‘conundrum’ raised by his students, Daniel Albornoz and David Kanter.

[However, his longer postscript reports on David Ricardo’s views on the same issues and Ricardo always tends to obfuscate Smith’s meaning, IMHO]:

[Jeff] ‘As we all know, Smith believes that the long-term process of socio-economic development, driven by the dynamics of the market and the division of labor, will steadily increase the overall productivity, prosperity, and "opulence" of societies over time. He also believes that the benefits of this increasing prosperity will be spread throughout the society (though, of course, unequally). In particular, he expects that, given the "natural progress of opulence," the standard of living of the poor—by which he means the great majority of people in society—will increase steadily and significantly (as long as the market is allowed to operate unhindered). From Smith's point of view, that consequence is one of the strongest justifications for the whole market system and its long-term developmental logic (e.g., WN pp. 22-24, 95-96, etc.).

After all, "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable" (WN p. 96).

“Smith further believes that, broadly speaking, he has plenty of historical evidence for expecting an ever-increasing "universal opulence that extends itself to the lowest ranks of the people" (p. 22). Smith “appears confident that this conclusion follows plausibly from the overall logic of his theory. However, it's fair to raise the question of whether or not Smith has provided an adequate and convincing theoretical account to explain how and why this happy outcome should occur.”

His students ask: “On what does Smith base this claim? Is it that prices will continue to drop as production becomes more efficient? Is it that wages will rise as there is more and more competition among capitalists?” In our discussion we struggled to flesh out Smith’s reasoning here. In light of how simple Smith envisions most tasks to be when the division of labor has reached an advanced state, what sort of incentive would capitalists have to pay labor more than survival wages? Smith seems to think that most anyone can do most any super-specialized job (hence his worry about “pinheadism”). If that is the case, any laborer could be replaced by any other laborer. And if that is the case, wouldn’t the equilibrium wage just settle at the wage necessary to keep the laborer and a few of his offspring alive? That sort of existence does not sound all that appealing.”

Jeff replies: “The first key point is that, according to Smith, one feature of the long-term process of socio-historical development is that the great majority of the population will "naturally" and necessarily become wage-laborers (or the wives and children of wage-laborers). That is, they will gain their livelihood, not by selling the products of their labor, but by selling their labor itself as a commodity. Labor, like every other commodity, has an exchange-value determined (more or less, and in the long run) by market processes and expressed in its price. So the material well-being of the vast majority of the population depends on the price of labor, which is to say the level of wages.

Rates of wages, like the prices of all other commodities, are "naturally regulated" (WN p. 72). How does that work? Like every other commodity, labor has both a "natural" price and an actual market price, and in the long run market forces (supply & demand, etc.) will push the actual price of a commodity toward its natural price. At any given moment, the actual price of a commodity may fluctuate above or below its natural price, but the natural price is "the central price to which the prices of all commodities are continually gravitating" (WN p. 73) as long as the market is allowed to operate without serious interference or distortion. Basically, the natural price corresponds to the cost of producing the commodity (relative to the costs of producing all other commodities in the system). If more efficient production techniques, technological improvements, and/or other factors allow that commodity to be produced at lower cost, then its natural price will go down—and vice-versa.

If we follow that logic, the "natural" price of labor in a particular society at a particular moment would be determined by the overall cost necessary to produce & reproduce laborers (including children who will become future laborers) and to maintain their capacity to go on working—i.e., a subsistence wage. So why should we expect wages (i.e., the price of labor) to keep increasing? Why wouldn't the "equilibrium wage," as you put it, "settle at" a subsistence wage? (And why shouldn't cheaper prices for food and other necessities simply lower the "natural" price of labor, and thus the level of a subsistence wage?)”.

[GK:] As I said, these are bright students. They have identified what could be a “conundrum”. And Jeff point I think is the base of a misunderstanding.

[Jeff] ‘As you also point out, this problem should be further sharpened if in fact, as Smith predicts, the "progress of the division of labor" means that the work performed by most workers, "the great body of the people," becomes increasingly narrow, specialized, simple, and mindless (WN pp. 781-782).

[GK:] Smith makes two distinct statements on the effects of the division of labour, those in Book V, so to speak, are aimed at a different audience for a different purpose to Book I. It is a common misreading not to bear the two separate audiences in mind, as I state regularly on Lost Legacy.

In Book V, Smith’s concern is with the general and socially deplorable ignorance of the common people, induced by scarce educational provision for their education as children. This is a serious social problem, not recognized by the upper orders (major landholders and place holders in society, who people the legislature and their influencers).

Smith had in mind the different traditions in Scotland (where he lived) and England (the larger partner in the Union that since 1707, made up the United Kingdom of Great Britain,). In Scotland, Protestant Church pressure since the 16th century had promoted ‘little schools’ in each parish, funded by local taxes, charities, and negligible fees from parents, to provide elementary schooling in ‘reading, writing, and account’ (arithmetic) from age 6 years for as long as parents permitted attendance (mainly boys). In England such provision was sparse and grossly ianadequte (after all, there were 60,000 parishes,).

Smith’s suggestion called for such ‘little schools’ to be set up generally in Britain to tackle the appalling ignorance (WN p 785-6), which dulled further the children of the poor when sent to work by parents (‘with little time for education’ and parents with ‘scarce able to afford the maintain’ ‘to earn their subsistence’ (WN p 784-5).

He bolstered his case with dire warnings of the consequences of not educating the poor in order to frighten the decision-makers to pay-for the necessary remedy. This can be see in WN p 788 in graphic terms relating to likely work in modern trades, subjected to the intensity of the division of labour in simplifying tasks. Ignorance plus simplicity in their working lives made for political instability; education plus necessary simplicity created a barrier to the influence of ‘the interested complaints of faction and sedition’ (WN p 788).

Moreover, on a broader point, relevant to the gist of Daniel Albornoz and David Kanter’s questions, is that the importance of the division of labor in WN is not confined to ‘pinheading’. Smith goes on to describe the complexity involved in the day labourers ‘common woolen coat’, which is the real import of WN. Supply chains were complex, even in the 18th century. As their complexity grew, so would the demand for labour, both locally and nationally, and worldwide.

But significantly, a day labourer’s wage had to cover both necessary subsistence – the biological requirements – and, increasingly since the 17th century, his purchase of the necessary ‘conveniences of life’ (which in total was the ‘annual output' of society and the cause of its growing employment, and growing, albeit, minimal requirements for higher (marginally), but ‘normal’ living standards as represented in the real wages of common labourers, and other trades people.

I think Jeff, plus Ricardo and the Marxists, narrowed their focus too much on biological subsistence, which favours pessimistic ‘immiseration’ and drifts away from Smith’s historical approach of taking into account the much wider range of ‘necessaries and conveniences of life’, which was a key difference of Europeans compared to the lives of African and Indian hunter-gatherers (the First Age of Man), when compared to common labourers in commercial society (the Fourth Age of Man; see Adam Smith Lectures in Jurisprudence, [1762-3] 1978, Liberty Find). See also how Smith documents to rising annual output of ’necessaries and conveniences of life’ for ordinary people in WN from Julius Caesar’s visit to Britain 50 BC, through to ‘the restoration of Charles II’ in 1660 and then to mid-18th century in WN , p 344.

He states this clearly: ‘The money price of labour is necessarily regulated by two circumstances; the demand for labour, and the price of the necessaries and convenience of life’ (WN p 103).

The changing components of ‘subsistence’ must be borne in mind when working abstractly with models that denude themselves of realism, as Ricardo was apt and proud to do – he certainly cleared the way for the pessimism of Marx, whose own models lead to ‘immiseration’ conclusions, which are contrary to the rising real incomes of labourers, in skilled, supervisory and new technology occupations - what some Marxists call the ‘aristocracy of labour’ - itself a product of ever more complex divisions of labour among supply chains, supplying rising populations, benefitting from deepening productivity.

Professor Mike Munger has shown how one or two companies today (in place of thousands in the 18th century) employ automated pin-making batteries of computer-driven machines to supply all UK pin output (and a couple of others in the US), which is a far cry from ever-greater immiseration of pin–making by chronically stupid, even ‘brain-dead’, labourers.

One last thought on Jeff’s condition on Smith’s vision: “as long as the market is allowed to operate unhindered”.

Part of the theoretical problem is that modern economists (and Ricardo, etc.,) ignore Smith’s historical approach to political economy, and judge his statements absent any context of what was actually happening around him.

No markets in the real world of 18th-century Britain were “allowed to operate unhindered”. It was the absence of “unhindered” operation in markets, including that for labour that, IMHO, characterizes the source of much of the uncertainty, described as a “conundrum” by Daniel Albornoz and David Kanter, and not addressed by Jeff.

Labour was far – very far – from being free in any meaning of the word. To the one-sided Combination Acts applying to labour but not to employers, were added the settlement of wages by local Magistrates, backed by jails, transportation, and public whipping of ring leaders of ‘riotous labour’, not forgetting the Settlement Acts, the Statute of Apprentices, the Trade Guilds, chartered monopolies, patent laws, the Poor Laws, and the oppressive religious environment (leading to migration to the colonies).

Mercantile Britain was in no way the home of perfectly competitive markets, and in the purer analysis that followed Smith, I think much of this context was lost. It bedevils proper understanding and creates its own demand for purer models, instead of questioning their realism. Predicting what happens in a pure theory is wide of the mark when looking at and understanding the real world.